by: Gavin Seaholme, head of sales at Shawbrook Commercial

Given the array of changes affecting the residential investment market, it has been somewhat predictable to see an uptick in commercial investment enquiries, with good yields and Full Repair and Insurance (FRI) leases that may well suit hands-on and passive investors.

Compared to the same point last year, we have seen a significant increase in commercial purchase enquiries with the majority of these being for wholly commercial properties as opposed to mixed use, so the predicted shift is starting to play out.

However, commercial investment is a different animal to the residential space, and one that needs to be researched and considered in far greater detail.

The business world is turbulent with many well-known high street chains continuing to suffer despite a relatively stable economy, with the leisure sector including pub and restaurant brands also struggling.

So investors considering commercial property must be very aware of exactly what they are looking to buy and who the likely tenant will be.

Capital depreciation

Stamp duty on residential purchases causes a bigger problem on higher value assets, so areas such as London are seeing these investments decline while commercial holds steady.

Taking the capital, we can say it has its own dynamic as far as commercial property is concerned.

First, this sector holds a significant value meaning many properties are owned by large institutions or foreign investors and do not come up for sale as frequently as in other areas.

London is also a key centre on the global map as a hub for business, so no matter what the future holds it will always be an attractive city from which to operate and hold investment property.

With the vast swathes of commuters that travel into London, we see additional pressures on infrastructure such as the rail network which has resulted in flexible work patterns.

This has promoted a rise in those working from home or opting for use of flexible working spaces.

This demonstrates the need for more properties that offer alternative use in order to accommodate these changing trends, both in work patterns and how companies choose to distribute their products (i.e. moving away from high street presence to online, leading to a rise in warehouses over retail).

Re-financing options

The reality with commercial property not owned by the corporate world is that these types of security have traditionally been longer term investments that are retained and passed down to family members.

This creates a good re-finance market and we have seen a number of commercial portfolios look to specialist lenders for financing due to the way income is stressed, the flexibility of products offered such as interest-only, higher loan to value (LTV) and less restrictive covenants.

The future of the commercial market, specifically in London, is likely to remain a steady one with investors who are able to adapt to a changing landscape likely to prosper.

The result of significant change such as Brexit may well dictate where some companies choose to operate, but this will be felt more acutely by global companies rather than domestic ones and so will have less of an impact on the general commercial property market.

Cautionary advice

Having stressed the impact of the residential changes, providing the government do not turn their attention to commercial investment, this security type is likely to continue to grow in popularity. Areas such as London, which traditionally offer investors capital growth as well as income, will continue to attract attention for the foreseeable future.

But perhaps we need a word of caution that in times of slowdown or recession, commercial property can often be hit the hardest, putting pressure on investors who opt to be highly geared, or who have a lack of surplus income to cover voids.

Seeking specialist advice with a view to careful consideration of key factors such as LTV’s and solid lease agreements is always advisable, and surely the most effective way to build sustainably for the future.

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